The inexperience of youth, poor financial advice, unexpected loss of employment, or any number of other factors can leave good person in need of a bad-credit car loan. A poor credit history report isn’t always reflective of your character or work ethic. However, it does affect the way a bank or lender sees you. Banks don’t factor in personal character traits when making their decisions. That number is often their first and only impression of you and it directly influences the way they see you as an investment. Because of that, a poor credit rating can make it nearly impossible to secure a traditional auto loan.
Ideally, you should avoid large purchases that require entering into any kind of loan agreement while working toward fixing your bad credit rating. Your focus should be entirely on paying down any outstanding balances and effectively managing existing credit accounts. However, for many people across the country, public transit isn’t an option, and a personal automobile is their only means of transportation between home and work. Other professions require personal transportation as a part of their job duties. For them, a car payment can be the difference between making money to pay bills or having no salary at all. In those cases, a bad-credit car loan becomes absolutely necessary, even if the terms of the loan aren’t particularly favorable.
For anyone currently facing that situation, we here at The Simple Dollar have created this guide to help you understand bad-credit car loans, find the best one for you, and also provide tips on how to manage them as you drive down that long road to credit recovery.
Three Best Bad Credit Auto Loan Options
Here are the best lenders and loan servicers of car loans for bad credit based on my research:
- Best for Special Financing: Auto Credit Express
- Best of the Big Banks: Capital One
- Best Lead Generator: MyAutoLoan.com
Keep reading to find out why these companies came out on top of my list of bad credit auto loans. I also outline several strategies that will help you keep your costs down and avoid scams once it’s time to make a deal for your new wheels.
Best for Special Financing: Auto Credit Express
If you have bad credit, Auto Credit Express offers a range of knowledge and options that may ultimately translate into a lower APR. Unlike many lenders, the company won’t automatically deny a loan for an older, high-mileage vehicle. You can get help here even if you’ve been through bankruptcy because the company works with traditional dealers as well as special-finance dealers who take on buyers with the lowest credit scores. In most cases, you’ll need monthly gross income of at least $1,500 to $1,800.
Who it’s best for: Buyers who need bad credit auto loans but want to keep their options open should take a look at Auto Credit Express, especially if you’re looking at an older car. It’s also among the most reputable, consumer-friendly options for car loans for bad credit — the company is accredited with the Better Business Bureau and has an A+ rating, and the website offers a lot of good educational materials for buyers.
Who should pass: Auto Credit Express won’t approve loans for anyone who wants to buy a car from a private seller.
Best of the Big Banks: Capital One
Capital One is one of the primary big-bank lenders for bad-credit car buyers, with more than 12,000 dealers accepting its financing. Among the other pros are competitive interest rates and extensive buyer-education resources. The Auto Navigator tool allows you to get pre-approved and compare car payments on specific vehicles without leaving your house.
Used-car restrictions are relatively liberal: They can be no older than 10 years old and must have fewer than 120,000 miles to be eligible for financing.
Who it’s best for: Bad credit doesn’t mean you have to go with an unknown lender, so if you want the security of a bigger bank, Capital One fits the bill. If you’re in the mid-Atlantic or South, you can also do business in person at one of Capital One’s many branches.
Who should pass: You can’t get a loan with Capital One if you want a car from a private seller or a lease buyout. And if you’re looking to get a loan for a very cheap car (under $4,000) or expensive car (more than $40,000), you’re out of luck.
Best Lead Generator: MyAutoLoan.com
MyAutoLoan.com puts you in touch with up to four lenders in minutes, even if you have bad credit.
One of the site’s most impressive tools is an interest-rate estimator that helps give you an idea of what kind of APR you might get. For instance, for a $15,000 used-car loan with a poor credit score of 580 in Columbus, Ohio, I might expect an average APR of 10.16% or a high of 25%.
The site is clear about terms: You must have at least $1,800 a month in income and no bankruptcies. It also restricts loans to cars that are eight years old or newer with fewer than 100,000 miles, potentially shutting out some borrowers. It’s up to potential lenders whether a co-signer or down payment will be required. MyAutoLoan has an A+ rating with the Better Business Bureau and many strong customer reviews.
Who it’s best for: If you want to compare offers from several lenders, MyAutoLoan could be a good pick, especially if you’re considering a private-seller transaction.
Who should pass: If you want to know exactly who will be soliciting your business, a service like MyAutoLoan isn’t for you. You also may not be able to get a bad credit auto loan for an older or higher-mileage vehicle.
Other Lenders to Consider
Wells Fargo: Along with Capital One, Wells Fargo is one of the largest lenders of car loans for bad credit, though it may be getting pickier — in 2015, Wells Fargo capped the loans it will extend to subprime buyers to lessen risk.
Wells Fargo approves loans for new cars, used cars, and (unlike Capital One) lease buyouts and private-seller purchases. You can manage your account online or head to one of 6,200 branches nationwide if you prefer to do business in person.
RoadLoans: RoadLoans.com is owned by Santander Consumer USA, one of the nation’s leading providers of bad credit auto loans. The site accommodates customers who are applying for all major loan types except lease buyouts.
RoadLoans is a standout when it comes to comprehensive FAQs about the lending process and customer-friendly tools and tips that help take the mystery out of car buying. A chat service is a nice bonus for those who have questions before applying. However, potential customers should be aware that it’s the subject of many poor reviews that complain of restrictive loans and too many credit checks. Santander is also at the bottom of J.D. Power’s 2015 auto financing survey.
Blue Sky Auto Finance: Blue Sky Auto Finance connects bad-credit borrowers with multiple lenders. Customers who’ve declared bankruptcy are still welcome to apply, though the bankruptcy must be discharged.
The site is clearer about requirements than many of its competitors: You’ll need at least a 550 credit score to receive a loan that isn’t restricted to a certain dealer, but may be eligible for dealer-specific loans if your score is lower. If your credit score is under 652, you’ll need to prove income of at least $1,800 a month. The site includes some good car-buying tips and finance calculators, but it is a bit cluttered and disorganized. Blue Sky is a relatively new company, established in 2004, but it has lodged few complaints and has an A+ with the BBB.
Understanding How Your Bad Credit Affects Your Car Loan
A poor credit score rating is always going to translate to a larger monthly payment on any approved auto loan. Lenders charge a higher interest rate to those with a lower credit score in order to offset their high default rates. The more money they make upfront from those interest payments will help to minimize their loss in the event that the borrower stops paying and the lender is stuck owing the remainder of the principal loan balance on the automobile. The higher the risk for the bank, the higher the monthly payment for the borrower. This is especially true for bad-credit auto loans.
The following table will give you a better understanding of how a lower credit score translates to higher interest rates (Annual Percentage Rate) and higher monthly car payments:
|FICO Score||APR||Monthly Payment||Total Interest Paid|
*based on a 60-month, $20,000 auto loan at current national average rates
As you can see, your credit rating can drastically alter the APR on any approved auto loan, either increasing or decreasing your monthly cost and lifetime interest payment. In order to help you plan your finances accordingly, we’ve created an auto loan calculator for you to use as a reference tool.
Auto Loan Calculator
With it, you can enter your current credit score, the price of your desired automobile, the length of your loan term, and down payment amount (if any). The calculator will then factor in the current average APR for that credit score and give you the estimated monthly payments, as well as an amortization schedule showing that payment amount against your principal balance and interest over the life of the loan.
So, using our example from the previous table, plugging in a FICO score of 660, a $20,000 automobile, a $0 down payment, and a 60 month loan term gives you an APR of 6.757% and an estimated monthly payment of $394. You can see in real time how lowering the credit score increases both the interest rate and payments.
It’s important to keep in mind that those with a deep sub-prime credit score (500 and below) can expect an APR anywhere from 14% to a 20% on your bad-credit car loan. Using the same example above, a 20% APR increases that monthly payment to $530, turning that $20,000 automobile into a $31,800 one over the life of the loan.
More so than the APR table, this calculator allows you to personalize the information to your specific situation in order to make the best decisions and better plan your financial future.
To gain a better understanding of your credit score and how it can affect things like your auto loan’s APR, check out our in-depth Credit Score Guide. In it, you’ll find valuable information on how you can improve your score in order to earn those lower payment rates on future auto loans.
How to Shop for Car Loans When You Have Bad Credit
Buying a car is a chore few people relish. While everyone likes a set of shiny new wheels, bargaining with dealers makes even shoppers with top-notch credit uncomfortable.
If you have bad credit, it’s even more important to be prepared. Here are some shopping tips specifically for buyers who need car loans for bad credit:
Before Going to a Dealership
There are a number of steps you can take to prepare for your auto purchase and subsequent loan application that will ensure the best financial decision and a smooth transaction. Here’s a breakdown of some of those things you should think about and do before ever stepping foot in a car dealership:
Tip #1: Determine your exact vehicle needs
Because you can expect to pay a much higher APR with a bad-credit auto loan, you don’t want to purchase an automobile that is either larger or includes more amenities than is absolutely necessary for your day to day travel. Both of these things tend to lead to higher costs. And conversely, if you have a large family, or if your job requires you to transport goods or supplies, you need to make sure that you don’t purchase a vehicle that is less than what you need. Things like gas mileage, total daily commute, and expected routine maintenance should also factor in to your planning. You know your personal transportation needs more than anyone else. Determining the exact nature of them before you head to the dealership will help ensure that you aren’t pressured into a purchase that would only worsen your financial situation.
Tip #2: Set a budget
A budget should be at the forefront of your planning when making any large purchase, especially one involving long-term financing and monthly payments. By using our auto loan calculator, you can better estimate those payments and figure out exactly how much you can afford to spend on a vehicle. Check dealer websites, auto buying magazines, newspapers, and any other available resources to get a better idea of the true cost and market value of your desired vehicle. This will help you make sure that you don’t overpay. A window sticker may seem like a good deal when you first walk onto the lot, but a little bit of research could easily prove that it isn’t.
It’s also a good idea to use our calculator to examine costs at different term lengths. You’ll notice that the longer the contract, the smaller the monthly payments. However, because of the continued interest payments, you will pay more in the long run. Many bad-credit car loans are 24-36 month terms, as opposed to the more traditional 48-60. Again, this is to reduce the risk for the lender by collecting more upfront in the event of a potential default. Make sure to factor in the potential for a smaller loan term when making your budget.
Also remember that many states mandate auto insurance, as do many lenders, so that’s another amount you’ll need to factor into the monthly costs associated with your auto loan. It’s a good idea to get an insurance price quote as a part of your vehicle budget planning.
Tip #3: Know what’s on your credit report
You should make it a habit to consistently monitor your own credit report, as it’s very important to know what’s in it long before ever walking into a car dealership or applying for an auto loan. Each of the three major credit bureaus are required by law to provide you with a free copy of your credit report once per year. To get your copy, you should go directly to the industry’s AnnualCreditReport.com website. And as with anything on the internet, beware of imitators with similar URLs. Never pay for your free credit report.
If you’ve already obtained your free copy for the year, you can purchase another one from any of the three major bureaus. To avoid any potential scams, it’s best to contact them directly. You can do so at:
You can use the information on this report along with our calculator to better estimate the terms of any bad-credit auto loan you may be approved for, and then plan accordingly.
Buying the Automobile
After you’ve done all your planning and research, you’re ready to put it all to use. Here are some things to keep in mind as you make your purchase:
Tip #4: Don’t move out of your price range
Any little bit extra tacked on to what you were planning to pay could end up costing a lot in the end as it will grow exponentially along with those interest payments, especially with the higher rates of a bad-credit car loan. You went through the work of making your budget. Stick to it.
Tip #5: Don’t be afraid to negotiate
It can seem like an intimidating proposition to some, but if you did the research, you already should know both what a car is worth and what you’re willing (and able) to pay. If the vehicle you need is out of your price range, do what you can to get it in your range. If it’s already in your range, try to get it lower if your research justifies it. Any little bit now can save you a lot in the long run. Because of your bad credit score, you most likely won’t be able to negotiate the terms of your auto loan, but you can always try with the purchase price.
Tip #6: Be careful with add-on products and services
Oftentimes, after you’ve already shaken hands and agreed to a purchase price and loan terms, you will be offered additional products and services before you sign a contract. Most likely, these were not included in the price quoted. If you agree to any of them, the cost will be added onto the previously-agreed cost of the car, which means it raises the amount of your financing. And because of the higher interest rates associated with that bad-credit auto loan, those products or services could significantly increase the cost of your monthly payments. Know the value of these services and whether they fit into your original budget before agreeing to any of them.
Tip #7: Read the contract. Ask questions
It’s conventional wisdom that is too often unheeded. Don’t sign anything until you read it. You know your financial situation and your needs better than anyone. And at this point, you should have done your research. If you are unsure of something, or have any questions, ask. And if you don’t feel comfortable for any reason, don’t sign. Once you sign the contract on the auto loan, you are legally obligated to it.
After the Purchase
After your bad-credit auto loan has been approved and your car has been purchased, there are plenty of things you’ll want to do and remember.
Tip #8: Keep a copy of your contract
Just as important as reading the auto loan contract before signing it is keeping a copy after. Make sure to get your copy, with all signatures and details filled in, before leaving the dealership. Don’t trust that they’ll arrive safely to you in the mail. After you do obtain your copy, make sure to keep it in a safe place in the event that you need to refer to it in the future.
Tip #9: Don’t miss a payment
Chances are that if you’re the recipient of a bad-credit car loan, you already understand the negative effects of late or missed payments. Setting up automatic payments is the best way to ensure that you pay your auto loan on time, and paying more than the minimum payment will help to decrease your total interest in the long run.
And if you’re having trouble making the minimum payments, it’s better to try to negotiate an alternative payment with the lender than not pay at all. Contact your lender as soon as you think you might be late with a payment. You’d be surprised how many are willing to work with you in that regard. Remember, because you’re already a high risk loan for the creditor, they may be quicker to repossess the vehicle if you miss even a single payment. And in some states, they can repossess without ever having to go to court.
How I Picked the Best Bad Credit Auto Loans
If you have bad credit, it’s not as simple to find an auto loan with a low rate as it is for others. For that reason, I considered many other factors in my recommendations, which I’ll detail farther down.
However, even if your credit isn’t great, make sure you include local banks and credit unions in your search. There is a lot of competition for car loans at every credit level, and you may be able to find competitive rates just a mile or two from your door.
Be sure to check out credit unions in particular. Though the application process may be more involved, they may have more flexible lending criteria than banks. And if you have a long-standing relationship with your own bank, they may have a better idea of your ability to repay a loan than other lenders.
I did not look at manufacturer-specific lenders such as Ford Credit or Honda Financial Services. If your credit is poor, you may not have the luxury of looking for one specific make of car.
The best bad-credit auto loan lenders and servicers provide:
|A wide variety of loans||It’s common for bad-credit lenders to focus on used cars, but the best lenders allow for both new and used loans. Bonus points went to lenders who allow you to get a loan to purchase a car from a private party.|
|Willingness to work with those who’ve been through bankruptcy||Some lenders will not consider you if you’ve declared bankruptcy, a common scenario for borrowers with the worst credit.|
|Educational articles and tools for borrowers||Knowledge is power, especially for borrowers with poor credit. The best lenders make a genuine effort to help borrowers understand the car-buying process and reduce their chances of default.|
|Strong customer support||There should be a number of contact options for borrowers with questions and clear FAQs about the borrowing process.|
|Reasonable and clearly disclosed requirements||If a lender caps loans at certain amounts, won’t allow loans for cars of a certain age or mileage, or requires a certain income or credit score, that information should be easy to find and comparable to limits set by other lenders.|
|Solid reputation||I considered each lender’s longevity, status with the Better Business Bureau, online reviews, and service as measured by J.D. Power’s 2015 Consumer Financing Satisfaction Study, if applicable.|
Terms You Need to Know When Financing Through a Bad-Credit Car Loan
Again, you’ll want to read any contract completely before you sign it. In order to help you understand that legalese, we’ve provided a list of common finance terms that you’ll come across before, during, and after signing for your auto loan.
|Additional Products or Services||Products or services that the dealer may,offer during a sale. These are in addition to the purchase price of the car.,Do not sign for any products or services you don’t want, as these will,increase the amount of your loan and payments over time.|
|Amount Financed||The dollar amount loaned to you for the,vehicle purchase.|
|Annual Percentage Rate (APR)||The dollar amount loaned to you for the,vehicle purchase.|
|Assignee||The lender that buys the contract from the,auto dealer.|
|Credit Insurance||Insurance that pays the remaining auto loan,balance if you die or become disabled.|
|Credit Report||A report of your previous loan and payment,history that the auto loan providers refer to in order to objectively,determine if you are a wise investment for them.|
|Credit Score||A number grade (called the FICO score) on your credit report that the three major credit bureaus (Equifax, Experian, and TransUnion) calculate from credit data in the following five categories: payment history, amounts owed, length of credit history, new credit, credit mix.|
|Down Payment||Money paid up front on the vehicle purchase,that reduces the amount of the auto loan.|
|Extended Service Contract||Protection in addition to standard warranty,that covers the maintenance and repair of certain vehicle systems for an,agreed upon term.|
|Finance Charge||A fee charged for the use of credit, such as,financial transaction fees in addition to the interest.|
|Fixed Rate Financing||A loan in which the interest rate stays the,same for the duration of the contract.|
|GAP Insurance||Guaranteed Auto Protection is additional,insurance that pays any difference between the amount an insurance company,pays for a stolen or totaled car and the amount you still owe on the auto loan.|
|Monthly Payment Amount||The amount paid each month toward the,balance on the auto loan.|
|Negotiated Price of the Vehicle||The amount paid each month toward the,balance on the auto loan.|
|Repossession||When the lender retakes possession of the,vehicle if the borrower stops paying.|
|Total of Payments||The total amount that will have been paid at,the end of the loan, the principal amount plus all of the interest.|
Common Car-Buying Scams
Having bad credit may make you feel like you’re in a vulnerable position when you’re buying a car. Unfortunately, your fears aren’t totally unfounded: Some unscrupulous car dealers try to squeeze more money out of buyers they sense are uninformed, desperate, or both.
The best guard against this is to educate yourself. There are dozens of car-buying scams out there, but here are a few of the most common you should watch out for when you have bad credit.
1. Yo-yo loans
Yo-yo loans are typically a problem for those with shaky credit who don’t (or can’t) get preapproved for a loan before going to the dealer. The dealer lets you take possession of the car even though your financing isn’t final.
You may think you have closed on a loan — until the dealer calls days or weeks later to tell you your financing fell through. Then you’re pressured to take a less-favorable deal in order to keep the car from being repossessed.
Your first line of defense against yo-yo loans is getting pre-approved before you go to the dealer. If you’re relying on dealer financing, demand to see the loan approval documents before you drive away. If they assure you that it’s OK to take possession of the car even if your loan isn’t final, stand firm. Refuse to take the car until you see proof that your financing has been approved.
2. Co-signer ‘straw purchase’ scams
Your dealer may pressure you to get a co-signer, saying you can qualify for a much lower interest rate on your loan and improve your own credit score if your co-signer has a great credit history. That may be true, but you’d first need to decide whether you want to risk your relationship with a co-signer if you can’t pay back the car loan, leaving them on the hook.
Some dealers may take this high-pressure tactic and make it a scam by confusing you and your co-signer during loan paperwork. You’ll walk out of the finance office thinking you co-signed on the loan, but weeks later, you may learn that the loan is only in your co-signer’s name — and yours is nowhere to be found.
To help avoid this scam, make sure you never feel rushed when you’re going over paperwork. Read the documents you’re signing, and in the case of co-signing, make sure you’re signing the same contract — not separate contracts.
3. The ‘as-is’ car that’s actually a lemon
Perhaps you’re checking out used cars — a common scenario if you have bad credit — and you see one with a tantalizingly low sticker price. The federally required buyer’s guide says it is “AS IS – NO WARRANTY,” but the dealer assures you this is routine and there are no problems with the car. You buy the car and it breaks down almost immediately, or you later find out that it was wrecked or flooded when servicing it or running the report you should have seen before buying.
Think twice before buying a used car if you don’t know its history. Checking the car’s title is a good first step, but it won’t always help if the title has been washed — that is, altered to remove evidence that a car has been salvaged. Strongly consider investing in a vehicle-history report from CARFAX or a similar provider to help protect yourself.
4. Refusal of online financing
Perhaps you’ve done your research and gotten preapproved for financing up to a certain amount for a certain APR through an online lender. In theory, this should smooth the car-buying process — you already have financing.
But the dealer may tell you they’ve had lousy luck with online lenders bouncing checks, and therefore can’t accept the financing. The dealer will, however, be more than happy to offer you their own financing — more than likely at a much higher APR than the one you’ve secured.
If you’re faced with a dealer who won’t accept your pre-approved financing, walk away. The only time you should use the dealer’s loan instead of the one you’ve already gotten is when the terms are better, not worse.
Starting Your Search for Bad Credit Auto Loans
Remember, even though bad credit will exclude you from prime interest rates, it won’t shut you out of the car-loan game entirely. It’s far easier to get decent auto loans for bad credit than mortgages or other large loans, so you’ll still have a good number of options.
The lenders I profiled above are worth checking out, but remember not to overlook your existing bank and local credit unions. You have nothing to gain and everything to lose by assuming a lender won’t work with you. Our top picks above, Auto Credit Express, Capital One, and MyAutoLoan.com are worth a look for starters.
Once you’ve secured a loan for your car, remember to insure your investment. Check out our guides on How to Get Cheap Car Insurance in 2016 and the Best Car Insurance Companies in 2016 to start your search.
We also have more help to offer consumers with bad credit. If you need a loan for reasons other than car-buying, check out our guide to the Best Bad Credit Loans for 2016. And if you’re looking for a credit card, we offer recommendations in our guide to the Best Credit Cards for Bad Credit.
Finally, if your bad credit is symptomatic of deeper debt problems, you may also want to check out our series on debt management: the Best Debt Management Companies for 2016, the Best Debt Settlement Companies for 2016, and the Best Debt Consolidation Loans for 2016.